I.Consumer Behavior
Culinarian cookware is sold through retailers and directly to consumers. Culinarian has carefully cultivated relationships with its limited retail network, comprised of three upscale kitchen specialty chains, two department store chains, and 75 local specialty stores. Direct-to-consumer sales are made through Culinarian’s website or its catalogs. Because Culinarian relies on a variety of intermediaries to sell its products through retail channels (see Exhibit A for details), it must be careful how any planned promotions will change incentives for those intermediaries. For example, price discounts offered by Culinarian may not be passed on to end users. Thus, although end users ultimately drive sales of Culinarian products, Culinarian must take care to protect the interests of retailers and their salespeople in order to remain successful. The Orion Market Research Study reveals a great deal of useful information regarding Culinarian’s target demographic.
Despite the many options to purchase remotely (via online vendors or mail order catalogues), purchases from retail locations account for 85% of total sales. See Exhibit B for details. This is strong evidence that consumers want to evaluate the quality and style of the cookware at the time of purchase. 75% of consumers in the study already own more than 5 pieces of cookware. See Exhibit C for more details. The majority of households in the Orion study had either given or received cookware as a gift, which aligns with evidence suggesting that cookware sales are seasonal – purchasing peaks occur in May and June (wedding season) and November and December (the holiday season).
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As a market leader in frozen food industry, Frozen Foods Division (FFD) of Giant Consumer Product (GCP) has been proved very successful in the past 30 years, with national market share of 43% in the “Italian frozen dinners and entree offerings” subcategory. However in 2008, FFD were in sales trouble. The gross revenue through Aug 2008 was under plan by 3.6% (with the equivalence of about $14.5m) ...
Because cookware is a durable good (i.e. it is not consumed and carries forward from one period into the next) it may be especially sensitive to sales discount cycles. Details on pre-sale losses and post-sale losses due to cannibalization are shown in Exhibit E. See Exhibit F for details on variation in cookware purchases by month. If consumers are purchasing in anticipation of annual events, they may be especially sensitive to promotional offers. This means that any analysis of cannibalization due to promotions or price discounts must be sure to analyze the full impact of pre and post-sale cannibalization.
II.Culinarian success factors
Culinarian has built a premium brand by producing innovative, high-quality cookware and developing strong relationships with retailers. Culinarian’s products are trusted by consumers who consider cooking to be their number one hobby (60% of Culinarian customers), and by professional chefs. The company meets the needs of these different segments by offering four product lines, each varying in terms of the level of technology and features involved, but all high quality. Culinarian has also been a leader in terms of metallurgic improvements in the cookware industry. Most important to Culinarian’s success, however, is its relationship with retailers. The company’s focused retail strategy allows the Culinarian sales team to visit retailers more often than their competitors, keeping retailers abreast of new products and training sales clerks as necessary. In addition, Culinarian products are more profitable for retailers than competitors’ products, creating additional warmth for their cookware among retailers.
III.Evaluation of 2004 promotion
Culinarian’s senior sales manager, Victoria Brown, maintains that the 2004 promotion was profitable, while a team of consultants believes it lost Culinarian money. The tables in Exhibit G depict each viewpoint on the effectiveness of the promotion, in addition to our own midrange analysis. Differences in the estimation of projected vs. actual sales largely accounts for the difference in profitability estimates. The consultants included cannibalization estimates in their model, while Brown argued that different “normal” estimates should be used when calculating sales. However, we find Brown’s belief that “there is no reliable way to calculate cannibalization costs” (case p.6) to be unconvincing; while the consultants’ numbers may not be perfect, they approximate the results of customers and retailers being able to plan purchasing around the price promotion due to the January notification.
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We included cannibalization in our midrange estimate for this reason. Brown and the consultants also disagree on the calculation of variable costs. Brown states that only direct labor and raw materials should be included, while the consultants include a much more comprehensive bundle of SG&A expenses and overhead. Either could be considered correct, but as a check we calculated a midway point in addition to the consultants’ perspective and Brown’s perspective. Brown’s numbers show strong profitability of $2.4 million due to the 2004 sales promotion, while the consultants’ numbers show a loss of $409,697 due to the promotion. Our intermediate scenario, incorporating cannibalization costs but splitting the difference between the consultants and Brown on both sales figures and variable costs, shows a weak profitability of $106,594 from the promotion. This weak profitability must be held against the negative side effects of price promotions in general, and particularly with regard to premium products.
IV.2007 promotion recommendations
We do not recommend that Culinarian continue offering price promotions. The fluctuations in demand for Culinarian products around the promotional period in 2004 indicates the likelihood that cannibalization occurred; we found that much of the growth in demand as well as the corresponding decline in demand before and after a promotional period had little to do with the typical monthly demand in the market. It seems very likely that the decreased demand we see before and after the promotional periods can be attributed to the cannibalization of full price sales by the discounted units sold during promotions. Another strong reason why we recommend against price promotions is that no other premium cookware manufacturer engages in these promotions. Part of cultivating a high-end brand image is making sure that products are priced accordingly, and making sure that consumers are able to distinguish between lower-end and premium products.
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Price can be an important indicator of quality, desirability, and status in this regard. Culinarian is extremely careful about maintaining its premium brand image, and offering regular price promotions along with lower-end producers such as Star Chef and Kitchen Select would likely erode the brand positioning that Culinarian had developed. However, we have developed two alternative recommendations to price promotions that may help strengthen Culinarian’s distribution network and increase sales. First, we recommend that Culinarian strengthen the point system currently in place to reward retail salespeople with Culinarian cookware. Emphasizing this alternative incentive would help maintain good retailer relationships, and would increase the motivation of salespeople to sell Culinarian.
Second, we recommend that Culinarian continue its free gift promotion in slightly altered form. Qualifying customers should be provided with a coupon that directs them to Culinarian’s website, where they can enter their information and have the gift shipped to them. By running the promotion through its website, Culinarian will remove the burden of free gift inventory costs for retailers and, more importantly, drive traffic to Culinarian’s underutilized website (currently less than 5% of sales are made through the website).
Additional web traffic could increase the proportion of direct purchases (with the attendant higher margins), as well as keeping customers more connected to the company and more likely to purchase Culinarian products in the future.
